There are a lot of ways to earn a second income. But one of the best, in my view, involves buying shares in companies that distribute their earnings as dividends.
I read the other day the average price of a pint in the UK is now £4.56. But if I invested that into the stock market, I could start receiving dividend income without having to work for it.
How often?
Let’s start at the beginning. £4.56 per week amounts to roughly £20 per month, or £237 per year. So should I invest that each week, or save it up until the end of the month or the year?
The first thing to note is the sooner I invest, the sooner I start receiving dividends. So if I save up for a year before investing, it will be a while until I get anything back in the way of income.
Equally, though, the more frequently I invest, the more often I have to work out what to buy. So the process becomes a lot more work if I have to do research every week as opposed to every year.
In my view, investing monthly is the best approach when it comes to the stock market. This allows me to build a portfolio reasonably quickly while also concentrating on my main income stream.
What to buy?
The next issue is what I should invest in. There are a lots of options, including bonds and real estate, but there are two reasons why my preference would be dividend stocks.
First, I’m looking to build a portfolio over a long time – a number of decades. That should allow me to persist through any stock market volatility without having to sell my investments in a downturn.
If I had a shorter timeframe, I’d probably look at bonds. Specifically, I’d look at bonds that have a maturity date in the near future to give myself a better chance of being able to get my money back.
Real estate is another option, but I think the stock market offers a more diverse set of opportunities. That should help me limit my risk somewhat.
Risks and opportunities
Investing in the stock market comes with risks. Returns from companies that pay dividends are never guaranteed – they might not maintain those payments in the future.
Strictly, this is true of some other investments, such as like bonds – if a company goes bankrupt, its bondholders might also lose out. But the risk is greater with shares.
Yet stocks are much more likely to increase the amount they pay out. Companies like Diageo, Legal & General, and Unilever have excellent records when it comes to increasing their dividends.
This won’t happen with bonds. That’s why I think, for an investor looking for a second income, quality dividend stocks will prove to be a better investmnet than bonds over the long term.
The price of a pint
With the price of a pint now at £4.56, it’s tempting to think about what else that money could do. And I like the idea of using it to earn an investment return.
I’m not saying I’d use all of my beer money for investments. But I could fight the rising cost of living in two ways by swapping one pint for investments that could earn me a second income.
